Forecasting the equity risk premium: The role of technical indicators

Forecasting the Equity Risk Premium: The Role of Technical Indicators Abstract Do existing equity risk premium forecasts ignore useful information, such as technical indicators? Although academics have extensively used macroeconomic variables to forecast the U.S. equity risk premium, they have paid relatively little attention to the technical stock market indicators widely employed by practitioners. Our paper fills this gap by studying the forecasting ability of technical indicators relative to popular macroeconomic variables. We find that technical indicators display statistically and economically significant out-of-sample forecasting power and generate substantial utility gains; moreover, technical indicators tend to detect the typical decline in the equity risk premium near cyclical peaks, while macroeconomic variables more readily pick up the typical rise near cyclical troughs. In line with this cyclical behavior, utilizing information from both technical indicators and macroeconomic variables substantially increases out-of-sample forecasting performance relative to either alone. JEL classification: C53, C58, E32, G11, G12, G1